Global cryptocurrency boom: Latvian tax treatment (1)

Although the global cryptocurrency boom has been going on for several years, it’s a comparatively recent fad in Latvia. The press and other media are publishing articles about changes in the cryptocurrency market, about goods and services that we can at last pay for using Bitcoin, and about various risks associated with these investments. This article aims to offer a brief “introduction into cryptocurrencies” and to answer the question of how individuals are taxed on their cryptocurrency dealings in Latvia.

What is cryptocurrency

Cryptocurrency is a virtual currency that can be used as a means of exchange (payment) just like any national currency. However, unlike traditional currencies, a cryptocurrency is not issued or guaranteed by the central bank of any country. Cryptocurrency transactions are protected and controlled using cryptography. Bitcoin is considered the world’s first cryptocurrency, but it’s not the only one – there are some other more or less well-known cryptocurrencies available on the market.

The main advantages of cryptocurrency include its technological protection and the opportunity to trade in cryptocurrencies on the global market in a simple way and with low commissions. And the value of cryptocurrencies is not affected by inflation. As a result, the demand for various cryptocurrencies has increased considerably in recent years, and cryptocurrencies such as Bitcoin, Etherium and Litecoin have grown in value at an extraordinary pace. And the idea of cryptocurrency allows us to buy a percentage of its unit (e.g. 0.3% of 1 Bitcoin). So, since the value of various cryptocurrencies directly depends on the demand and supply dynamics, increasingly more users are investing in cryptocurrencies, thereby contributing to their value growth.

At the same time, if we step back from the overall excitement about this phenomenon, the cryptocurrency boom has created difficulties not only for the financial regulators around the world, who have even likened cryptocurrencies to the Wild West of the financial market, but also for the tax authorities, who need to find the answer to the question of how the global cryptocurrency boom could generate more tax revenues.

Government position

Although Latvian legislation is silent about cryptocurrency, several government agencies have stated their views on the proper treatment, or rather the lack of it.

The State Revenue Service’s current position is that from a financial accounting perspective, cryptocurrency should essentially be recognised as a product that can be used as a means of exchange if the parties agree on that. Similar views have been expressed by the Bank of Latvia, stating that cryptocurrency is a contractual, not statutory, means of payment that can be used in transactions of exchange. The Financial and Capital Market Commission also recognises that “Bitcoin and similar instruments cannot be considered an official currency or legal tender because the way these types of instruments can be issued and used remains unregulated and they are not linked to any national currency.”

So we can conclude that Latvia treats cryptocurrency as any product or service whose value needs to be measured in an officially recognised currency. Since there are various cryptocurrency markets based on supply and demand, this position offers advantages and restricts the users, for example, by not explaining the tax treatment of cryptocurrency dealings.

More difficulties stem from the unpredictable cryptocurrency fluctuations, which are dependent only on the demand for a particular cryptocurrency rather than on economic conditions in any country. We recently witnessed a rapid fall in Bitcoin value due to a large percentage of Bitcoin investors using a sell limit order, which provides for selling Bitcoin once its value reaches EUR 10,000. However, that fall was followed by a steep rise in Bitcoin value: over the last four months the value of 1 Bitcoin has quadrupled from USD 3,686 on 15 September 2017 to USD 15,952 on 5 January 2018.

Early steps in the European Union

While there is still no consensus on the regulation of cryptocurrencies at EU level, the Court of Justice of the European Union (CJEU) stated in its ruling of 22 October 2015 on the case Skatteverket vs David Hedqvist that Bitcoin is neither a security that grants ownership to legal entities nor any similar security. The purpose of Bitcoin is to be a means of payment. In the court case the CJEU emphasised that transactions which involve exchanging traditional currencies for Bitcoin units and vice versa should be exempt from VAT. So the CJEU recognised that Bitcoin with its goal to be a means of payment can be treated as a currency being used as a means of payment.

Since Latvia is bound by CJEU rulings, it’s important to note that the VAT Act should be interpreted in a way that recognises cryptocurrency units as a means of payment, and dealings in cryptocurrency units should be exempt from VAT.

The European Commission has also issued an opinion indicating, among other things, that there are plans to regulate cryptocurrency transactions. However, these initiatives are mainly associated with anti-money laundering and counter-terrorism financing. At the same time, it’s clear that introducing the regulation of cryptocurrency would involve making major amendments to several pieces of EU legislation governing the financial sector.